Warren Buffett and the story of Berkshire Hathaway

Who is Warren Buffett?

Warren Buffett is a titan in the world of investing and the stock market. He is the Chairman and CEO of Berkshire Hathaway, an investment company that owns over 60 companies as subsidiaries. They also own other investments such as shares in other companies. The company reported earnings of $4bn in 2018. Berkshire Hathaway are listed on the New York Stock Exchange. Warren Buffett has a reported net-worth of $85bn and is number three on the worlds rich list.

Warren Buffett and Berkshire Hathaway

You may have wondered where the name Berkshire Hathaway comes from. Wouldn’t naming the company after himself make more sense?

Well, here is the story of how Berkshire Hathaway, the investing giant came to be.

In 1964, Warren Buffett was investing through his investment company Buffett Partnership Ltd. The company held a 7% stake in textile manufacturer Berkshire Hathaway. The manufacturer was struggling in a tough market. Buffett had bought the shares at a discount in anticipation of being able to sell them back to the company at a profit once they consolidated their business.

Buffett received an offer from Berkshire Hathaway for the shares, as he predicted. He informally advised the head of the company Seabury Stanton they had a deal. However, in a fascinating turn of events that would shape the next five decades and beyond, Berkshire Hathaway submitted a formal offer marginally less than the price agreed. Buffett ignored the offer. He has stated he was “irritated” by the antics so instead “began to aggressively buy more Berkshire shares”.

As a result of the increased shareholding Warren Buffett’s company become the majority shareholder and gained control of Berkshire Hathaway in 1965. He had 25% of his company’s capital invested in Berkshire, so needed to turn the business around. He oversaw the continued struggle of the business over the next 18 years before shutting it down in 1985.

So here lies the mistake that Buffett has reflected on making all those years ago. He made a decision purely borne out of raw emotion rather than sound investment logic. He admits to this and it certainly taught him an important lesson. One that we can all take on board.

Warren Buffett’s biggest mistake

However, you might be surprised to hear that Buffett does not believe this was the most serious mistake he made. In 1967 the opportunity to purchase a “small but promising” insurance company called National Indemnity Company (NICO) arose. Buffett liked the industry. The owner was an old friend of his and he was up for the deal. Sounds good right?

However, the devil is in the detail. Buffett elected to buy NICO for $8.6M using Berkshire rather than his own and original investment entity, Buffett Partnership Ltd. Here are Buffett’s reflections on what this meant for him:

Him and his investing partners did not own 100% of NICO. Had he purchased the company using Buffett Partnership Ltd. they would have done, giving them the foundation to grow the investment company.

He was now even more tied into Berkshire Hathaway and his investing performance was hampered by NICO’s funds being tied up in the struggling textile business.

NICO and subsequent acquisitions made were part owned by the original, legacy shareholders of Berkshire Hathaway who represented 39% of the shareholding.

Buffett has reflected that his decision ultimately means approximately $100bn was diverted away from him and his investment partners and to the legacy shareholders of Berkshire. Or in his words, “a collection of strangers”.

What we can learn from Warren Buffett’s decisions

In the end, Buffett hasn’t done too badly. As of the release of the latest Annual Report, Berkshire Hathaway shares now have a market value 2,472,627% greater than they did in 1965. This equates to a compounded annual return of 20.5%. Indeed, not bad at all.

Buffett credits his long-time partner and Vice Chairman of Berkshire Hathaway Charlie Munger with helping to shift his mindset after the mistakes of the 60’s. Here is what he says about Charlie:

“The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

Lesson 1

Buffett’s first lesson was to make investing decisions based on evidence. He looks for strong businesses that will be profitable in the long-run rather than chasing a quick profit as he was when he first bought shares of Berkshire Hathaway.

Lesson 2

Secondly, Buffett learned the importance of not making investment decisions driven purely by emotion. He knew that Berkshire Hathaway’s textile business was not a good investment but he was so irritated by them marginally reducing their offer that he was determined to teach them a lesson.

Lesson 3

Lastly, Buffett learned the importance of making decisions with the long-term in mind. He wishes now that he had taken a step back and looked at the bigger picture when purchasing NICO.

Reading anything Warren Buffett says or writes today, all of these lessons ring true. He is a huge advocate of long-term value investing, through making rational evidence-based decisions.

So, there it is, the story behind why Warren Buffett’s investment company is called Berkshire Hathaway.

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